Convertible Arbitrage Theory

Convertible arbitrage theory focuses on the pricing of a convertible note in relation to the underlying ordinary asset. Convertible arbitrage is a market neutral investment strategy frequently employed by hedge funds. It involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.┬áThe principle of the strategy is that the convertible is sometimes priced inefficiently relative to the underlying stock, for reasons that range from illiquidity to market psychology.